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Egypt drops pound: masterstroke or miss?

13 March 2024 - Joost Derks

The Egyptian pound fell hard last week. By transitioning to a more flexible exchange rate, the country is killing two birds with one stone. The tourism industry is getting a boost and Egypt is also receiving a significant support package from the IMF.

A higher interest rate makes it more attractive to hold assets in the relevant currency. The Egyptian pound was a notable exception to that rule last week. The country's central bank raised interest rates from 21,25% to 27,25% last Wednesday. However, the pound came under heavy pressure immediately after that decision. The coin lost almost 40% of its value within a day. This was entirely the result of the decision to largely abandon the fixed exchange rate of the pound. This move is quite painful for the population, as imported items suddenly become considerably more expensive. In the long term, the National Bank of Egypt's choice may well turn out well.

Billions back to the homeland
Firstly, an important hurdle has been removed for Egyptian migrants to transfer money to their home country. Due to the artificially high exchange rate, more and more Egyptians in other countries chose to channel their income back through the black market. In the second quarter of 2022, guest workers transferred the equivalent of €8,25 billion. Over the course of last year, this fell to just over €4 billion per quarter. The devaluation of the pound makes it a lot more attractive for Egyptians abroad to funnel money back to the family they left behind. The tourism industry is also getting a big boost thanks to the lower exchange rate.

Beautiful weather and wonders of antiquity
In the first fifty days of 2024, the country received 6% more tourists than a year earlier. In view of the geopolitical tension and the conflict in Gaza, this is a major boost. But the increase pales in comparison to the tourism growth of 25% to 30% that the country is aiming for. In addition to the approximately four thousand year old pyramids and a wealth of other historical treasures, Egypt also has the climate. In the main tourist coastal towns, the average temperature in May is around 30 degrees. A significantly devalued pound also makes it a lot more attractive from a financial point of view to travel to the country. Finally, Egypt is also being pressed by the IMF for the interest rate increase and especially for making the exchange rate more flexible

Tough measures with a golden edge
The organization released an additional $5 billion loan package in response to the measures. In combination with the resources that Egypt receives from lenders from the Middle East, this puts somewhat of a floor under the economy. The severe setback does not necessarily have to be the start of a new slide. If inflation comes under control thanks to the interest rate hike and foreign currency inflows increase thanks to booming tourism and a higher influx of foreign workers, the Bank of Egypt's tough measures could even give the economy a significant boost. In any case, it is a bonus for sun lovers that a holiday in the country becomes a bit cheaper.

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

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